Loss reserves for the U.S. property and casualty insurance industry may have depleted by up to US$14 billion in 2008, according to a new report by Moody's Investors Service.
In its report, U.S. P&C Insurers' Reserve Adequacy Shrinks, Moody's estimates the U.S. P&C industry carried about US$5 billion to US$12 billion in excess loss reserves entering 2008. As of the end of the third quarter, about US$9 billion of this had been depleted.
"Based on an early look at regulatory financial statements, the pattern of reducing loss reserves accelerated in the fourth quarter, with a total of about [US]$14 billion in reserves being released for the year," says the report's author, vice president Paul Bauer.

The reduction in loss reserve strength warrants caution for two reasons, Bauer says.
First, it implies lower profits for 2009, because property and casualty companies will be much less able to bolster current calendar-year earnings by using prior-year reserve releases, which has been the case in the recent past. "Secondly," the analyst states, "the decline in reserve adequacy implies a further weakening of balance sheet strength in what is already a difficult market environment."
Bauer concludes the overall trend is negative and that "insurers have fully harvested their reserve redundancies, leaving them little or nothing in the way of a cushion."
But putting the matter into perspective, Bauer says Moody's still believes "the property and casualty industry's overall capital adequacy remains relatively strong, with generally conservative underwriting leverage and with adequate -- although no longer comfortably redundant -- reserve levels."
As a result, he continues, "we would not expect to take any broad rating actions in the near- or medium-terms based solely on this trend."
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